2016 (11) TMI 667 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on disallowance under Income Tax Act; payments to labour sardars exempt from TDS.

The Tribunal upheld the CIT(A)'s decision to delete the disallowance under Section 40(a)(ia) of the Income Tax Act, amounting to Rs. 2,04,79,685. The ... TDS u/s 194C - Disallowance made u/s 40(a)(ia) - Held that:- There is nothing on record to suggest that the payment to labourers were paid to the contractors. On the contrary, assessee has made payment to labourers directly and in support of its claim, Ld. AR of assessee has produced the muster roll. In this regard, Ld. DR failed to bring any defect / information from the muster roll which suggested that the labour charges paid by assessee are subject to TDS. Since no cogent material has been brought on record, in our considered opinion, AO was not justified in invoking the provision of Sec. 194C r.w.s. 40(a)(ia) of the Act. - Decided in favour of assessee. Issues Involved:1. Whether the CIT(A) was justified in deleting the disallowance made under Section 40(a)(ia) of the Income Tax Act, 1961, amounting to Rs. 2,04,79,685/-.Detailed Analysis:Issue 1: Justification for Deleting Disallowance under Section 40(a)(ia)The core issue revolves around whether the CIT(A) was justified in deleting the disallowance of Rs. 2,04,79,685/- made by the Assessing Officer (AO) under Section 40(a)(ia) of the Income Tax Act, 1961. The disallowance was made on the grounds that the assessee failed to deduct tax at source (TDS) on payments made to labour contractors.Facts of the Case:The assessee, a partnership firm engaged in civil contract work, debited Rs. 2,04,79,685/- towards labour charges in its profit and loss account. The AO observed that these payments were made to 14 labour contractors without deducting TDS, thereby warranting disallowance under Section 40(a)(ia). The assessee contended that the payments were made to labour sardars, who were paid a commission included in the labour payments, and that no individual payment exceeded Rs. 20,000/- in cash, thus falling outside the purview of Section 194C of the Act.Arguments and Findings:The CIT(A) deleted the disallowance, observing that there was no contract between the assessee and the labour sardars, and hence, the provisions of Section 194C were not applicable. The CIT(A) emphasized that the payments were made to labourers through labour sardars, who merely received a commission for managing the labourers. The CIT(A) concluded that the labour sardars could not be considered labour contractors within the meaning of Section 194C, and thus, the obligation to deduct TDS did not arise.Revenue's Appeal:The revenue argued that the CIT(A)'s observation regarding the absence of a contract was incorrect and that the payments made to the labour sardars exceeded Rs. 50,000/- annually, necessitating TDS under Section 194C. The revenue contended that the ledger accounts provided by the assessee were insufficient to substantiate the claim that payments were made directly to the labourers.Tribunal's Decision:The Tribunal upheld the CIT(A)'s decision, citing several judicial precedents that supported the assessee's position. The Tribunal noted that the AO had not provided any evidence to show that the payments were made in pursuance of a contract with the labour sardars. The Tribunal referenced the decision of the Hon'ble Calcutta High Court in CIT vs Stumm India, which held that in the absence of evidence of a contract, the obligation to deduct TDS under Section 194C did not arise. Additionally, the Tribunal cited its own decisions in similar cases, such as Samanwaya vs ACIT and ACIT vs Supreme Construction, where it was held that labour sardars and labour contractors were distinct, and the absence of a contract precluded the application of Section 194C.Conclusion:Based on the judicial precedents and the facts of the case, the Tribunal concluded that the CIT(A) was justified in deleting the disallowance made under Section 40(a)(ia). The Tribunal dismissed the revenue's appeal, affirming that the payments made by the assessee to the labour sardars did not warrant TDS deduction under Section 194C, and thus, the disallowance under Section 40(a)(ia) was not applicable.Final Order:The appeal of the revenue was dismissed, and the order pronounced in the open court on 14.10.2016.